Sun Life loss narrows to $140-million

Sun Life Financial Inc. said on Thursday that a list of items ranging from higher capital levels to potentially higher taxes mean it's unlikely to return to its normal profit levels next year.

The insurer lost $140-million in the latest quarter, compared to a loss of $396-million in the same period last year, with much of the pain this time around stemming from an update of its assumptions about how interest rates and other factors will affect its insurance business.

As it released its third-quarter results, the company also said that it is forecasting “normalized" profits for the year ended Dec. 31, 2010 to be in the range of $1.4-billion to $1.7-billion. That compares to average annual operating earnings of $2.1-billion from 2005 to 2007.

During those years, interest rates were relatively stable, stock markets were rising and credit conditions were favourable, Sun Life said.

“Going forward, earnings are expected to reflect today's lower asset levels and account values as well as higher risk management costs, potential volatility and uncertainty in capital markets, the expected higher levels of capital required by regulators, lower leverage, currency fluctuations and the potential for higher tax costs as governments around the world look to address higher deficits."

“There is underlying strength in our business but we continue to face challenging economic headwinds," chief executive officer Don Stewart said Thursday. “Earnings in the third quarter were negatively impacted by previously announced actuarial assumption updates as well as credit markets."

The assumption updates caused a $513-million charge in the third quarter, and Sun Life had to boost its reserves by $194-million because of downgrades on holdings in its investment portfolio. Those hits were partly offset because the company was able to release $161-million in reserves as stock markets rose.

Insurers update their actuarial assumptions every year by looking at what they believe interest rates and stock markets are going to do. Those assumptions determine the value of their liabilities – the annuity and insurance payments that they'll have to make to their customers in the future. Many years the process results in few or no changes. This time around, extreme stock market volatility, unusual interest rates, and new criteria from the Canadian Institute of Actuaries are driving bigger changes.

A portion of the hit that Sun Life has taken this quarter could be released back into profits in the future if assumptions change again.

The company's revenues actually amounted to $8.83-billion in the quarter, up from $2.56-billion in the same period last year, thanks to higher mark-to-market values of many of the assets it holds in its trading portfolio, and the impact of the weaker Canadian dollar. Investment income this time around was $4.3-billion, $6.1-billion higher than the third quarter of 2008.

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